Just transitions and gilets jaunes

A fair approach to climate change policy

A former colleague asked me a few months ago about the Just Transition on Climate Change. We chatted about fairness and justice and its implications. In the end, their investment institution did not sign up to the investor statement in this respect. And that put them in perhaps a minority among ESG-minded investment institutions, for when the Investor Statement to Support a Just Transition on Climate Change was launched in the outskirts of the Katowice climate change summit, the latest COP or conference of the parties to the UN Framework Convention on Climate Change, it was signed by 116 investment institutions with some $5.46 trillion assets under management.

The concept of a Just Transition in effect means taking into account social issues in the approach to climate change. In the increasing way of these things, the investor statement is no more than a signal and in effect commits the investment institutions to nothing in particular. Rather, they assert that they will integrate just transition concepts into one or more of their investment approach, capital allocation, company engagement activities, public policy campaigns or transparency. We shall see whether it will indeed change behaviour.

The Just Transition idea originates with the organised labour community: in 2013 the International Labour Conference adopted a set of conclusions seeking to ensure that labour issues are embedded in any move towards a more sustainable economy. As paragraph 4 reads:

“A just transition for all towards an environmentally sustainable economy … needs to be well managed and contribute to the goals of decent work for all, social inclusion and the eradication of poverty.”

Nick Robins and others at the excellent Grantham Research Institute on Climate Change and the Environment deserve particular credit for bringing this issue to the fore in investor thinking. But perhaps the activities of the gilets jaunes in Paris and across France have made the need for fairness and justice in climate change policy more apparent to all.

The catalyst for the street protests by campaigners without any formal leadership and self-identifying by wearing the high-vis vests that all French drivers must carry was an increase in fuel duties. But the disquiet that they were so vigorously expressing seemed rather more broad-reaching. Not least, the sharply retrogressive tax changes that President Macron had implemented — and is now rapidly withdrawing. 

Once again it is fairness that needs to be applied. Of course, the Paris Agreement already captures climate change fairness of one form: by insisting on different CO2 reduction trajectories for developed and developing economies it understands that the current levels of atmospheric CO2 are largely the results of past industrialisation by developed economies and recognise that it would be unjust — and politically impossible — to bar developing economies from economic development by applying constraints equally.

In some ways the concept of the just transition is a smaller scale reflection of the same concept of fairness: the burden of the fundamental economic changes that carbon constraints will wreak need to be borne by those with the greatest means to pay, rather than those with least flexibility and resources. At present, because carbon taxes largely fall equally across the income distribution, their effect is in practice regressive and so they appear unfair — an impact made more immediate given that many of those hit most hard by the economic dislocations caused by a carbon transition will be among the less well-off.

In part the response to this challenge will need to be hypothecation of tax revenues. I suspect this is an issue I will return to in future blogs, but hypothecation is the explicit allocation of tax revenues to spending in a particular way. Governments, and particularly treasury departments, don’t like hypothecation because it reduces their freedom of action and constrains them to certain forms of spending. Our politicians would much rather have ongoing budgetary flexibility, a large pot of unconstrained money from which to allocate to what they deem the political necessities of the time.

But this is precisely the point: hypothecation introduces a little more tension into government’s relationship with the people and so ensures a fuller sense of accountability. Hypothecation of taxes to spending commitments can help maintain the licence to levy tax. A hypothecation of green tax revenues to explicitly progressive tax relief could help mitigate unfairness that these taxes impose. Even if it did not entirely remove opposition to such taxes it could significantly draw its sting.

It increasingly looks like whatever emerges from Katowice will not be a strong agreement, limited by a bizarre coalition of the unwilling, Kuwait, Russia, Saudi Arabia and the US, who refuse to acknowledge the implications of the recent IPCC report encouraging a 1.5 degree rather than a 2 degree world (and rather than the 4.5 degree world that our current trajectory seems set to take us to). These four countries share little apart from wealth built on economic fossil fuel dependence. They may succeed in delaying concrete responses to climate change, the effect of which will be an increase in the eventual cost, and imposing a greater burden on those least able to bear it — because the physical impacts of climate change thus far seem to fall disproportionately on the poorest countries and the poorest communities. 

That isn’t just, and it isn’t fair.